Investors should position for a resurgent USD

The book by Ro Khanna, The Entrepreneurial Nation, which was reviewed by Firstpost, is released at the right time. It talks about the US coming to the forefront of the world economy and all indicators point to the US resurgence. This is especially true over the last one year as US equities and the US Dollar have been the best performing assets in the world. US equity indices - Dow, Nasdaq and S&P 500 - have rallied by over 15% while the USD index, which measures the USD against a basket of major currencies, has rallied by around 10% over the last one year.

The US economic data itself will not suggest the country is in a great shape. The US Federal Reserve (Fed) has revised GDP growth for the country downwards from 2.9% to 2.4%. The government debt is at its highest ever at $16 trillion and the country is headed for a so-called Fiscal Cliff, if the government goes ahead with higher taxes and spending cuts to bring down the debt.

Reuters

Unemployment rate at 8.1% is 250 bps over long-term averages and the economy is not creating enough jobs to bring down the unemployment rate. Interest rate at zero percent levels cannot go down further and there are expectations that the Fed may expand its already bloated balance sheet to provide stimulus to the economy. The Fed's balance sheet size at $2.8 trillion is up from levels of below $1 trillion over the last five years.

In fact, there are a whole lot of USD bears and gold bulls out there in the market saying that the USD is doomed and the only solace for the USD's failure is gold. The USD bears are of the opinion that the bloated US government debt and the relentless expansion of the balance sheet by the Fed will debase the currency leading to chaos in world markets. The last one year, however, has not been good for USD bears with USD gaining and gold prices staying down by 10% from highs. USD bears will continue to face pressure on shorts going forward as the US economy enforces its dominance in the world economy.

The reason the US is coming out in full force is that the country inherently wants to do well. The performance in the London 2012 Olympics is a case in point where the US topped the medals chart as its athletes strove for glory, differentiating it from the second spot of China that forces its athletes to do well. The US, whatever its faults are, has given rise to the brands that actually now dominate the world.

In India and across the world, the US brands dominate day-to-day life. An average person across the world wakes up and puts on his or her Nike for a run. iPod is used for listening to music while running, conversations are made on iPhone or its clones, web browsing in on iPad or its clones, web searches is on Google, browsers are Explorer or Safari, operating systems are Microsoft or IOS, social media is Twitter or Facebook and McDonald or Pizza Hut is the main choice for food. Websites across the world use software and services offered by the US companies from Go Daddy.com to GoToWebinar.com. The web economy, which is expected to double in the next four years in the G20 nations as per a Google study, is dominated by the US.

The dominance of the US in the day-to-day lives of an average person across the globe is a clear sign of the changing fortunes in the world economy. In one way it is good as it takes focus away from the BRIC (Brazil, Russia, India and China) and allow these countries to set things in order. Brazil and Russia are over dependent on commodities, India is mired in poor economic governance and China is feeling the weight of a state-controlled economy that believes in spending its way out of trouble.

Investors are better off being USD bulls than USD bears going forward and should focus on US influence over the world rather than on the economic issues surrounding the US itself. The former may just settle the latter.